Qualifying Investment Funds for Corporate Tax UAE

In a significant move to bolster the investment landscape, the UAE Cabinet has unveiled Ministerial Decision No.81 of 2023. This pivotal legislation outlines the criteria investment funds must meet to qualify as Exempt Investment Funds, thus being eligible for corporate tax exemptions. The directive is a cornerstone of the UAE's corporate tax law, focusing on Investment Business, Real Estate Income, Real Estate Gains, and the operational benchmarks for Real Estate Investment Trusts (REITs).

Understanding the Qualification Criteria

 Key Business Activities:

The business activities of the investment fund should primarily revolve around Investment Business activities, while any other business endeavors conducted must be ancillary or incidental to the main activities, as prescribed in the applicable state laws. 

Ownership Interest Restrictions:

If an investment fund has less than ten investors, no single investor or their related parties are allowed to hold over 30% of the fund's ownership interests. In cases where a fund has ten or more investors, the limit increases, prohibiting any investor and their related parties from owning more than 50% of the ownership interests.

Expert Management Requirement:

The investment fund must be overseen or advised by an Investment Manager comprising at least three investment professionals

Investor Control Avoidance:

The day-to-day management of the investment fund should not be under the control of its investors.

Resident Investment Managers:

The Business Activities of a resident Investment Manager attributed to a resident investment fund should be regarded as Investment Business activities. Accordingly, the Taxable Income of the Investment Manager should be adjusted following the provisions in Article (20) of the Corporate Tax Law.

Business Activities Attributed to Resident Investment Funds:

Business Activities of an Investment Manager attributed to a resident investment fund shall be considered Investment Business activities if they meet any of the following conditions:

  • Investment Manager Subject to Corporate Tax: The Business Activities are subject to Corporate Tax in the state through the Investment Manager.
  • Conditions to be satisfied: The Business Activities undertaken by an Investment Manager that meet the conditions specified in Clause (1) of Article (15) of the Corporate Tax Law, provided that the reference to the Non-Resident Person in that Clause was related to a Resident Person.
  • Ancillary or Incidental Business Activities: Any other Business Activities conducted by the investment fund should be considered ancillary or incidental if the combined Revenue of such activities does not exceed 5% of the total Revenue of the investment fund in the same Financial Year."

Timeframe for Ownership Interests Fulfillment:

The following points are to be considered: 

  • Early Fulfillment Consideration: An investment fund can be recognized as having met the ownership interest conditions outlined in paragraph (b) of the Clause related to Exemption Conditions and Authority's Discretion.
  • Waiver in Initial Years: The fulfillment of the conditions specified in Clause (1) of the mentioned Article during the initial two Financial Years after its establishment can be waived if adequate evidence demonstrates the investors' intention to satisfy these conditions after the initial two Financial Years. 
  • Authority's Decision: The Authority holds the authority to determine such fulfillment.

Exemption for Non-Compliance:

If the investment fund fails to meet the ownership interest’s conditions stated in Clause (3) of the same Article, it will lose its status as an Exempt Person from the start of the third Financial Year after its establishment.

Guidelines and Implementation of Decisions:

The decision not only outlines the conditions but also provides detailed guidelines for the implementation of these requirements. It addresses crucial matters, such as attributing the Business Activities of a resident Investment Manager to a resident investment fund, and clearly defines Investment Business activities in such scenarios. The status of ancillary or incidental Business Activities conducted by the investment fund is also clarified. Provisions related to meeting ownership interest conditions in the initial two Financial Years and the consequences of non-compliance after that period are also specified.

Special Considerations for REITs (Real Estate Investment Trusts)

To qualify as Investment Funds, REITs (Real Estate Investment Trusts) must meet several specific conditions. These conditions involve holding real estate assets exceeding a specified value, floating a portion of their capital on a Recognized Stock Exchange, and ownership by designated institutional investors. Additionally, they must maintain an average percentage of real estate assets over a specific period. This ensures that REITs align with the necessary qualifications for tax exemption and regulatory compliance.

Tax Treatment and Compliance

For investors in Qualifying Investment Funds, their income for the relevant Tax Period shall be adjusted based on the fund's financial statements and their ownership interests. The decision further covers the treatment of distributions received from the fund's income and includes provisions for Unincorporated Partnerships as Taxable Persons. The Minister may issue implementing decisions, and the decision shall come into effect upon its publication in the Official Gazette. This is a significant step to streamline taxation for investment funds in the UAE.

The latest Decision introduces specific conditions for Qualifying Investment Funds seeking corporate tax exemption, covering main business activities, ownership interest restrictions, management requirements, and avoidance of investor control. The decision clarifies tax treatment for investors and outlines provisions for Real Estate Investment Trusts (REITs) to qualify as Qualifying Investment Funds. It also includes comprehensive guidelines for implementation, addressing Business Activities attribution, ancillary or incidental activities, and consequences of non-compliance.

Avail expert advisory from top Tax Consultants in the UAE

The UAE Ministerial Decision No. 81 of 2023 aims to create an investment-friendly environment while ensuring compliance with tax regulations. Therefore, it is recommended that Investment Funds consult with reputable Corporate Tax Consultants in the UAE to accurately assess their tax obligations in accordance with corporate tax laws.

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